Pan-United Corporation - Lifted by forex gains

Maintain HOLD, TP S$0.59.

We maintain our neutral stance on Pan United as we find outlook for its core businesses mixed.

Although we see earnings improving due to one-off buyout of the loss making Tug and Barge business by the key shareholders, core fundamentals for the Basic Building Materials (BBM) business remain weak. Even though the stock now trades at a lower 14.7x FY17F PE, valuations are still above 10 year average of 13x at +0.5SD of its mean.

No significant improvement in BBM.

Demand and selling price for Ready Mix Concrete (RMC) continues to be soft. Market demand for RMC reported by Building Construction Authority (BCA) fell 14% in 9M16 due to slower pace of construction.

Prices of RMC have continued falling on increased competition, slower pace of projects and overcapacity. The Port earnings are reported to be stable, providing support to earnings. We remain neutral while awaiting BBM segment to turnaround.

Absence of losses from Tugs and Barge business to lift earnings.

The loss making Tug and Barge business divestment has led us to increase our earnings by > 30%. The key lift will be the absence of depreciation drag of S$5m from FY17F.

The residual business in the Shipping segment has left us with a S$1m earnings estimate going forward.

Valuation

SOTP valuation methodology.

Our TP of S$0.59 is derived from a sum-of-parts valuation of Pan-United.

On a per share basis, we value its RMC business at 10x FY17F PE at S$0.14, CXP port operations at S$0.55 based on 15x forward port earnings, CCIP port at S$0.14, net debt and others at -S$0.25 per share.

Key Risks to Our View

Pan-United’s outlook is based on construction activities backed by civil projects in Singapore.

Acceleration in private projects may cause a surge in construction demand, leading to better earnings outlook and upside to its share price.

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